Every day, before their shifts begin, workers at the Campbell Soup (CPB) factory in Maxton, N.C., huddle with managers to find ways to save the company money. The savings they achieve—and the savings realized at other companies' plants across the country—help explain why U.S. corporations are piling up profits without hiring enough people to put a big dent in unemployment.
U.S. companies slashed 8.5 million jobs during the recession. At the same time most have slowed capital investment plans. Instead, companies such as Campbell, DuPont (DD), and United Parcel Service (UPS) are asking employees to help them save cash by working smarter with existing technology. The efficiency gains make it less likely that recession-casualty jobs will come back. "When the productivity growth comes, then watch out, because that is when companies start not needing so much labor," says Edmund Phelps, a Columbia University economist and Nobel laureate.
Data compiled by Bloomberg shows that in the most recent quarter, 142 nonfinancial companies in the Standard & Poor's 500-stock index had raised operating margins by three percentage points or more from the final quarter of 2007, when the last expansion peaked. Among them were homebuilder Lennar (LEN), cable operator Discovery Communications (DISCA), and Teradyne (TER), a maker of chip testers.
Annual growth in productivity, or how much output is produced in an hour of work, averaged 3.4 percent in the five quarters since the 18-month recession ended in June 2009. Efficiency gains have helped profits of companies in the S&P rebound 23 percent since the fourth quarter of 2007. Sales have declined 9 percent over the same period.
Yet the latest data from the Bureau of Labor Statistics show that while firing has slowed, hiring hasn't picked up. Job gains from new or expanding businesses were 6.1 million in the first quarter, the lowest quarterly rise since the recession ended. U.S. companies "live in a perpetual state of recession" because of global competition, says Thomas J. Schneider, chief executive officer of consultant Restructuring Associates. "They are much more disciplined about staying lean."
Joblessness in the county where Maxton is located was 11.1 percent in September. A fountain in Maxton's center is dry; the town hall clock tells the wrong time. Dave Biegger, Campbell vice-president for North America supply chain, says the reward for increased efficiency is a stable job and more business.
Productivity gains come when hundreds of nitpicky efforts combine to save time, money, and effort. On a new Swanson broth line at the plant, which processes 260 million pounds of ingredients a year, operators and mechanics numbered each gasket to speed repairs. They cut windows into the metal coverings of conveyor belts so they can spot the signs of wear. They color-coded valve handles to avoid confusion in settings.
Campbell says operating efficiency at Maxton has climbed to 85 percent of what its managers figure is the maximum possible, up from 75 percent three years ago. A 1 percent gain in plant efficiency in North America adds $3 million to operating profits. Head count at Maxton has risen to 858 from 812 in 2006, mainly because of the new broth line.
To offset inflation, the company must find $80 million in annual savings at all its plants. Beyond that, Biegger says the company needs to find a significant innovation every year. Campbell workers in 2009 reduced costs by $86 million in the U.S. soup, sauce, and beverage businesses, which had sales of $3.7 billion. In the latest quarter, earnings fell 8.2 percent because of declining soup sales.
Biegger's team is working with researchers to reinvent how Campbell makes soup. In the past, each soup had a unique recipe. Now Campbell uses common bases for multiple soups, such as chicken broth, and differentiates with seasonings, meat, and vegetables. Similarly, automakers use a common chassis for multiple cars and then differentiate. "We have to collaborate at the highest levels of the organization right down to the plant floor," says Biegger, who built a 20-person team to cut costs. "You explain, you teach, and you allow the work to evolve through the creativity of the team. Then we push ourselves to stretch beyond what we believe is possible."
The daily worker-manager huddles are about "getting everybody involved," says "Big John" Filmore, a 28-year plant veteran. "Instead of being told what to do, we get to tell people about our problems." He helped streamline production to better fit with the plant's cleaning schedules. Now operators such as Filmore review all line schedules.
Quarterly earnings reports from other U.S. companies cited productivity gains as a reason for strong profits. UPS trucks carry devices that track how many left turns against traffic its drivers have to make. The system helps drivers optimize routes and will save 1.4 million gallons of fuel per year when fully deployed, says spokesman Norman Black.
Former Federal Reserve Chairman Alan Greenspan says companies need to keep innovating or the current burst of cost-saving will run its course and margins will shrink. "We have been experiencing this harvesting for a year or so," he says. "You have to ask the question: Are we running out of backlog?"
The bottom line: Companies such as Campbell are working hard to boost productivity. That means fewer new workers will be brought on.